Most people would probably guess that software giant Microsoft Corp. (MSFT ) has the richest profit margins in the industry. They'd be wrong. The winner of this contest is little-known Check Point Software Technologies Ltd. (CHKP ), the leader in making software that protects Web sites from hackers. It has an enviable 52% operating margin, compared with Microsoft's 45%. And seven-year-old Check Point, No. 10 on this year's Info Tech 100 list, is no small fry. It made a $221 million profit on $425 million in revenues last year.
There are two reasons Check Point has turned into a cash machine. First, though it has an American headquarters in Redwood City, Calif., it does most of its development in Tel Aviv, Israel, where the cost of doing business is 60% of what it is in the U.S. Second, Check Point has only a skeleton sales and marketing team. It relies on a network of 1,000 resellers who do most of the sales and marketing on its behalf. "By creating those channels, they're essentially just a pure software company," says analyst Chuck Jones of Salomon Smith Barney.
Check Point has something else going for it. The company focuses on doing just a couple of things really well. Its main product is a firewall, which keeps hackers from breaking into corporate computer networks. It also produces so-called virtual private network (VPN) software, which allows companies to send information across the public Internet but protect it every step of the way with encryption technology. These are good businesses to be in. The market for firewall software, which was about $800 million last year, is expected to grow 25% a year for the next three years. The VPN market, which was $500 million last year, is forecast to grow 33% a year, according to UBS Warburg.
While other security companies create sweeping sets of products, Check Point has stuck to its niches. CEO Gil Shwed believes there's no need to stray because there's still plenty of untapped potential in his markets. "At the end of the day, the demand for Internet connectivity is still growing," he says. "And corporations will always need security."
Sales of security software have held up better than other categories because this stuff helps companies save money. Two years ago, real estate manager Equity Residential Properties Trust was spending $35,000 a month to connect remote offices to its headquarters in Chicago. By moving that communication onto the Net and installing Check Point's VPN software, those costs dropped to $5,000 a month. "It made me a big hero around here," says John Shelest, senior network engineer in charge of the project.
Check Point can't afford to relax. Although it dominates the firewall and VPN markets with a 41% and 52% share respectively, Cisco Systems Inc. (CSCO ) is the second-biggest seller of firewall software and third in VPNs. And Cisco has an advantage: It can embed security features right into its networking equipment. Check Point fights back by forming alliances with other hardware makers, such as Nokia (NOK ), and by making its software run on every major type of computer. With such a broad reach, it's likely to remain the moneybags in this business.
By Jim Kerstetter in San Mateo, Calif.